Download C-68 - IIROC

Revision of Bulletin C-51 dated December 30, 1992
TO:
CHIEF FINANCIAL OFFICERS - IDA MEMBER FIRMS
December 23, 1993
PANEL AUDITORS - IDA AUDIT JURISDICTION FIRMS
C-68
CONCENTRATION OF SECURITIES
The purpose of this bulletin is to provide guidance in determining the capital charge for
concentration of securities required pursuant to Instructions to Schedule 9 of Form 1
(JRFQ&R) of the SRO By-laws and Regulations.
1. What is the purpose of the new Concentration of Securities Regulation?
The concentration Regulation codifies existing policy rules dealing with concentration of
securities which have been embedded in the Instructions to the JRFQ&R. A capital charge
to the firm is introduced for any concentration by the firm exceeding a specified threshold
for any single security or group of related securities of the same issuer ("the security")
carried by a firm in inventory, purchased or sold by clients on margin or carried in
delinquent cash or COD accounts. The Regulation attempts to address the unlikely
situation where "the security" in which a member firm and its clients have a high
exposure, substantially decreases (long positions) or increases (short positions) in value in
a relative short period of time.
The rule is not designed to inhibit the member firm from making a business decision to
take a certain amount of risk; it is designed to preserve a minimum level of residual
capital such that a member that takes on high exposure to a single security or group of
related securities of the same issuer might liquidate or buy-in, as the case may be, such
securities without cost to the firm as a going concern.
2. How does the Concentration Regulation define exposure?
Essentially, the concentration rule defines exposure as the incremental exposure to a
particular security captured by the concentration rule which is the market value of the
security less any margin already provided on that position. In client accounts, an
additional computation is made to include any excess margin in the account as protection,
reducing the amount of exposure to the member as a result of the possibility of the
security in question declining in value by an amount significantly greater than the margin
provision.
3. What is the capital charge for a concentration of securities?
The member must aggregate these exposures by security across inventory and client
accounts. Where the exposure exceeds 2/3 of the member's risk adjusted capital (RAC)
before minimum capital required and securities concentration charge as most recently
calculated, a capital charge of an amount of 150% of the excess of the exposure over the
threshold is levied, unless the over exposure is eliminated within five business days of
when it first occurs. Otherwise, 150% of the excess amount is required to preserve a
minimum amount of RAC in the event that the exposed security becomes valueless.
In the event that the total amount being loaned (as computed pursuant to this Regulation)
by a member on any one security for all client and inventory accounts exceeds an amount
equal to 1/2 of the member's RAC before minimum capital required and securities
concentration charge as most recently calculated, and the amount being loaned on a
second or further security which is being carried by a member for all clients and inventory
accounts exceeds an amount equal to 1/2 of the member's RAC before minimum capital
required and securities concentration charge as most recently calculated, a capital charge
on the second and further security of an amount equal to 150% of the excess amount is
required, unless the amount is eliminated within five business days of the date it first
occurs.
4. How does the member determine exposure ("amount loaned") in a security for the
purpose of the concentration rule?
For the purpose of the concentration calculation, the member will only consider the
greater exposure determined in separate calculations made for all long security positions
and short security positions for any single security or group of related securities ("the
security") carried by a firm in inventory, purchased or sold by clients on margin or carried
in delinquent cash or COD accounts (see attached example).
The member will determine the exposure in the security as follows:
I. In respect of long positions:
a)
the loan value of long securities in margin accounts on settlement date;
b)
the loan value of long securities in a regular settlement cash account when any
portion of the account is outstanding after settlement date;
c)
the loan value of long securities in a delivery against payment cash account
when such securities are outstanding after settlement date;
d)
the loan value of long inventory positions on trade date; and
e)
the loan value of new issues carried in inventory twenty (20) business days
after new issue settlement date.
II.
In respect of short positions:
a)
the market value of short positions in margin accounts on settlement date;
b)
the market value of short positions in a regular settlement cash account when
any portion of the account is outstanding after settlement date;
c)
the market value of short positions in a delivery against payment account when
any portion of the account is outstanding after settlement date;
d)
the market value of short inventory securities on trade date.
5. Are all securities captured by the concentration Regulation?
The securities that must be considered for the concentration Regulation test include:
a)
all long and short positions in equity and convertible securities of an issuer; and
b)
ll long and short positions in debt or other securities, other than debt securities with
a margin requirement of 10% or less.
Security positions that qualify for margin offsets may be netted.
6. What provisos exist to reduce the exposure in a security?
The member may deduct from individual client exposure of the total exposure in a
security.
a)
any excess margin in the client's account; and
b)
25% of the market value of long positions in any non-marginable securities in the
account provided such securities are carried in readily saleable quantities only.
7. Are the value of trades with financial institutions and other members included in the
concentration calculation?
a)
Balances with Acceptable Institutions (AIs), Acceptable Counterparties (ACs),
members of participating institutions of the CIPF and members of recognized
exchanges (Regulated Entities) which are outstanding ten business days past
settlement date and are (i) not confirmed for clearing through a recognized clearing
corporation, or (ii) not confirmed by the AI, AC or Regulated Entity, must be
included in the concentration calculation in the same manner as delivery against
payment (DAP) cash accounts.
b)
For any accounts of parties which are not Acceptable Institutions, Acceptable
Counterparties or not members of a Canadian SRO or members of a recognized
exchange, trades less than ten days past regular settlement date do not have to be
included in the calculation of potential concentrations if they have been confirmed
on or before settlement date by a settlement agent which qualifies as an Acceptable
Institution.
8. Must the member report the concentration of securities to the SRO?
Where there is an over exposure in a security and the special capital charge as referred to
above would produce either a capital deficiency or a violation of the Early Warning ByLaw, the member must report the over concentration situation to the Director of
Compliance, on the date the over concentration first occurs.
IDA By-Law 17.1 requires members to maintain at all times risk adjusted capital greater
than zero as calculated in accordance with Form 1. Members are reminded that, at a
minimum, they are required to calculate their capital position on a weekly basis and retain
evidence of such calculation. The calculation should give due consideration to the
monitoring of potential concentration of securities on an ongoing basis.
Any questions regarding this bulletin should be directed to Louis P. Piergeti, Director of
Compliance at (416) 364-6133.
PLEASE DISTRIBUTE TO ALL INTERESTED PARTIES IN YOUR FIRM
Securities Concentration Sample Calculation (Attachment)